「Trend Research by LD Capital」Stacks, layer2 network of Bitcoin
Summary:
Miners’ sustainable earnings issue has emerged, and the Bitcoin community is facing a potential computing power crisis. The development of the Bitcoin smart network ecosystem can effectively enhance network usage and solve the problem of miners’ sustainable income. However, network congestion severely hampers the development of the Bitcoin network ecosystem, highlighting the importance of Layer 2 (L2) solutions. Among these, Stacks is the most thriving in the Bitcoin second-layer network projects and is about to receive a significant update by the end of 2023.
This article will introduce the mechanism of Stacks and two important DeFi protocols in its ecosystem: ALEX and the Arkadiko Protocol.
Each time Bitcoin block rewards halve, miners’ earnings also halve. As transaction fees contributed by Bitcoin transactions account for less than 5% of miners’ income, the computing power system has always relied on doubling the Bitcoin price. As Bitcoin’s market value rises, and volatility gradually decreases, the mining reward after halving may gradually fail to cover the computing power costs. Hence, Bitcoin needs a sustainable income source. With the explosion of applications, Ethereum’s ecological applications have already solved the problem of sustainable income, but due to Bitcoin’s block time and smart contract limitations, it cannot generate sustainable income.
The Bitcoin NFT protocol, Ordinals, has opened the prelude to the Bitcoin ecosystem’s explosion. Network usage has increased, and transaction fees have soared to early 2018 levels. As of May 11, the number of Ordinals BRC20 tokens broke through 14,000, and the number of inscriptions forged surpassed 5.8 million times, leading to a corresponding increase in miners’ earnings. The growth of Bitcoin network’s daily transaction fee income in mid-2019 and 2021 was due to the overall market’s high activity, while this time, the transaction growth comes from innovative developments in the Bitcoin ecosystem, with BTC’s daily transaction fees reaching a maximum of over 600 BTC.
Image: Total daily transaction fees on the BTC network, calculated in BTC.
However, the capacity and speed of the BTC network have restricted the development of related transaction activities. If BTC has an L2 layer like the ETH ecosystem to create more use cases and fees, it could greatly increase the income of network miners and maintain the growth of computational power.
As the BTC halving approaches, the popularity of the BTC L2 concept continues to rise.
Given the current block production speed of the Bitcoin network, the halving is expected to occur in May 2024. BTC halving has always been one of the hottest events in the market. As the halving time approaches, more capital will focus on Bitcoin, but due to its large market capitalization, investing in Bitcoin can only yield market Beta returns. L2 projects that release BTC liquidity and expand the BTC application layer could very likely become the preferred targets for funds seeking Alpha returns.
Stacks is the most thriving project in the BTC second-layer network, and it’s set to welcome a major update by the end of 2023.
Due to the high difficulty of technical development, there have always been relatively few L2 projects on BTC, and market enthusiasm has been low. While the Lightning Network is well-known, it focuses on P2P payments and is not a direct competitor to Stacks. Stacks is currently the most thriving project in the BTC L2 concept. At the end of 2023, the Nakamoto upgrade that Stacks will undergo will bring a comprehensive improvement to the network performance, and it will launch a crucial product — SBTC. Given the upcoming BTC halving cycle, there is a possibility that Stacks could attract excessive market funds.
Background Event:
Image: STX price trend
On February 21, 2023, the BTC price broke through the $25,000 mark for the first time in seven months. The Ordinal Punks, based on the Bitcoin NFT protocol Ordinals, set off the boom of BTC NFT projects. According to the Twitter information of the bot Ordinal Punk Sales, an Ordinal Punk that was minted at a price of 0.01 BTC once sold for as high as 9.5 Bitcoins, worth more than $240,000.
Ordinals is a Bitcoin NFT protocol, launched by Casey Rodarmor on January 21, 2023. Its core technical point is to uniquely identify the smallest unit of Bitcoin, satoshi, by adding specific content to the script of taproot script-path transactions, thus enabling traceability. A satoshi with specific content can be understood as an NFT on the Bitcoin network. Using Ordinals doesn’t require Bitcoin side chains or second-layer networks, and it can be used without making any changes to the Bitcoin network.
Subsequently, user @domodata believed that when the information attached in the Ordinals protocol is set to a unified standard, the Ordinals protocol could not only issue non-fungible tokens (NFTs) but also fungible tokens (FTs). Therefore, on March 8, @domodata created the first experimental BRC20 standard token ORDI through the Ordinals protocol. As of May 10, the historical highest price of ORDI exceeded $29, and there were over 14,000 types of BRC20 tokens. The cumulative number of inscriptions forged by Ordinals reached up to 5.7 million times, with a single-day peak of 400,000 times on May 7. Moreover, the main types of Ordinals are images and text. The outbreak of text-type (BRC20) tokens on April 23 significantly increased the usage rate of the Bitcoin network.
Image: BRC20 Tokens
Image: Number of Ordinals Inscriptions Forged
Image: Types of BTC Inscriptions Forged
The popularity of BTC NFT and BRC20 has also led to an increase in transaction fees on the Bitcoin chain, and miner earnings have grown correspondingly. The peak of single-day transaction fees in USD has already leveled with the bull markets at the end of 2017 and April 2021. Ordinals has brought a new trend, but BRC20 and BTC NFT are not based on actual use cases. Whether the trading volume of BTC NFT and BRC20 will disappear from public view after the heat subsides still needs time to verify.
Image: Daily BTC Transaction Fees in USD
At the same time, what comes along is the congestion of the Bitcoin network, with the number of unconfirmed transactions reaching nearly 400,000. Bitcoin developers Erik Aronesty and Ali Sherief both initiated discussions on “whether it’s necessary to reject non-standard Taproot transactions” to address the problem of Bitcoin network congestion. Most of the community opposed this proposal. On May 7, the founder of the cross-chain project Interlay proposed the BRC21 standard for cross-chain assets from Ethereum and other chains to the Bitcoin chain, but the congestion of the Bitcoin network is one of the key obstacles to the development of the Bitcoin ecosystem.
Image: Bitcoin Network Status (May 10, 2023)
The phenomenon of increased miner fees caused by the issuance of BTC NFT and the boom of BRC-20, the issue of Bitcoin network congestion, and the direction of Bitcoin network ecosystem development — these all deserve our reconsideration of the long-established concept of BTC L2 and its future development prospects.
BTC Layer2
Historical Discussions
The second layer network (BTC L2) solution for Bitcoin was born to address Bitcoin network scalability and high transaction fee problems. As early as 2015, Joseph Poon and Thaddeus Dryja proposed the concept of the Lightning Network, which is currently the most well-known project. The Lightning Network, by establishing payment channels, realizes fast and low-cost Bitcoin transactions, greatly improving the scalability of the Bitcoin network. Currently, the number of nodes and application scenarios of the Lightning Network are rapidly developing.
The Lightning Network primarily solves the issues of slow BTC payment speed and high costs, but it does not address the lack of native application building for BTC. Thus, during the same period, the concept of Bitcoin sidechains (Sidechain) was also proposed. Blockstream first proposed and developed a sidechain called the Liquid Network, which went live in 2018. Another protocol that launched around the same time was RSK (Rootstock), which is more famous than Liquid.
Due to the massive workload and high technical difficulty in developing BTC-based L2, RSK and Stacks gradually became among the few projects in BTC L2 that could enable application building on the Bitcoin network.
Around 2019, Ethereum network projects were thriving, while the BTC network was languishing. The community began to discuss whether we really need BTC L2, or whether we just need a good BTC cross-chain protocol to release BTC’s liquidity. The Bitcoin anchored token protocol witnessed an explosion, with the current largest BTC anchored token protocol being born during this period. As subsequent developments have shown, both BTC-anchored tokens and BTC-based stablecoins have encountered issues:
- The most significant issue is security and reliability. As these protocols often merely lock BTC in multi-signature addresses, the security and cooperative relationships of the signatories become potential risks, deterring users with large amounts of assets from using anchored token schemes.
- Lack of native application scenarios in the Bitcoin ecosystem, heavily dependent on Ethereum. The importance of a reliable BTC L2 network is undeniable. It will provide the underlying technical framework for more native and secure Bitcoin anchored tokens, as well as provide an environment for the development of Bitcoin second-layer applications. It is key to transforming BTC from a passive income asset to an active income asset.
Since 2015, different solutions such as Drivechain, RGB Protocol, and Statechains have been proposed. This report will focus on Stacks for analysis.
Here are several important proposals for Bitcoin scalability projects in history:
Stacks Project Introduction
Project Overview and Roadmap
- Stacks is a smart contract layer for Bitcoin, aiming to allow smart contracts to use Bitcoin as an asset and settle transactions on the Bitcoin blockchain without the need for trust.
The initial version of Stacks was launched in early 2021, introducing Bitcoin transaction settlement, adopting the Clarity language for smart contract design, and supporting atomic asset swaps with BTC. The goal of the Stacks layer is to transform BTC into a productive asset rather than a passive one, enabling various decentralized applications to enhance the Bitcoin economy.
While Stacks does not directly call itself a Sidechain, we believe that Stacks essentially still builds a new chain outside the Bitcoin chain, with an independent governance structure and transaction model. However, unlike the usual Sidechain which bridges assets only through cross-chain bridges, Stacks integrates with the Bitcoin main chain by submitting anchoring transactions on it. These anchoring transactions contain a digest of block header information on the Stacks chain and some additional information and are broadcast to the Bitcoin network to ensure their immutability. Moreover, the project allows applications and smart contracts to use BTC as their asset or currency, settling their transactions on the Bitcoin main chain.
Therefore, it can be defined that Stacks is an innovative Sidechain model. Compared with the Rollup scheme of ETH, which is the so-called “native Layer2”, both bundle multiple transactions into a batch and submit it to the blockchain for verification. This approach can effectively reduce the number of transactions on the blockchain, thus improving overall performance. The main difference is:
- Verification Mechanism: Stacks uses PoX (Proof of Transfer) consensus algorithm, while Optimism Rollup uses PoS (Proof of Stake) consensus algorithm.
- Security: After ETH switches to the POS mechanism, the miner and the validator are the same role, and the validation nodes on the Rollup chain need to pledge a certain amount of ETH as a security guarantee. In Stacks, however, miners and transaction validators are two roles. Transaction validators need to pledge STX tokens (mining BTC), and miners need to pledge BTC on the Bitcoin main chain (mining STX).
2018 Q4 Mainnet launch
2018 Q4 Official wallet Hiro Wallet released
2019 Q2 Submitted $50 million to SEC, applying for compliant token issuance
2019 Q2 Stacks 2.0 white paper released
2019 Q2 Introduced Clarity contract development oracle
2019 Q3 Became the first SEC compliant public fundraising project
2019 Q3 Raised $23 million through token issuance
2020 Q1 Implemented Proof of Transfer (POX) consensus mechanism
2020 Q2 Stacks 2.0 testnet launched
2020 Q2 Submitted development report to SEC
2020 Q4 After the launch of Stacks 2.0, STX is no longer considered a security under U.S. law (SEC did not publicly agree with this view)
2021 Q2 Released Stacks Accelerator ecological development project
2021 Q2 Released Stacks expansion plan Hyperchain
2021 Q4 Audited Clarity contracts
2022 Q2 Released version 2.05.0.2.0
2023 Q1 Stacks 2.1 version released
2023 Q1 Launched Hiro developer platform
2023 Q4 Major update, Nakamoto network released
2023 Q4 Major update, SBTC released
2.The Architecture of Stacks and How It Works
Stacks’ technical architecture includes a core layer and subnets, with developers and users being able to choose between the two. The Stacks mainnet is highly decentralized but has a low throughput, while subnets are less decentralized but have a higher throughput. Given that the miners/operators of a subnet can require high network bandwidth among the mining pools, such as using data center nodes, they can even whitelist the subnet mining pools to ensure high performance.
Image: Stacks Architecture
The Stacks core layer interacts with the Bitcoin layer based on the PoX (Proof of Transfer) mechanism. PoX is a staking system similar to PoS, and their interaction process is as follows:
Image: Interaction process between different roles in Stacks
STX miners participate in leader elections by sending transactions on the Bitcoin blockchain. A verifiable random function (VRF) is used to randomly select the leader for each round (giving more weight to higher BTC bids), who then writes new blocks on the Stacks chain.
STX holders can participate in consensus and earn BTC rewards through a process known as “Stacking.” This process involves users locking their STX for a reward cycle (approximately two weeks), running or supporting a full node, and sending useful information on the network via STX transactions. STX holders who actively participate in Stacking will receive Bitcoin rewards for that cycle.
- PoX miners bid on the Bitcoin layer to become the leader of the next block. They participate in the bidding by spending Bitcoin and earn STX tokens as a reward.
- Once PoX miners win the leader bid, they start creating a new block and add it to the Stacks layer. This process is achieved through chain anchoring, which binds information in the Stacks blockchain with information on the Bitcoin blockchain.
- Within the Stacks layer, the new block contains all the latest transactions and state changes. These transactions and state changes are broadcasted to the entire network and are verified and confirmed by other nodes.
- Once a new block is confirmed, it’s added to the Stacks blockchain, and all relevant parties can see the latest state.
The interaction between the Stacks core layer and the Bitcoin layer is achieved through a process called “chain anchoring.” Chain anchoring is the process of binding information from the Stacks blockchain to the Bitcoin blockchain. This process ensures that all transactions and state changes occurring in the Stacks network can be traced back to the Bitcoin blockchain and can be proven to be recognized and protected by the Bitcoin network.
Specifically, each Stacks block contains a hash that points to the previous Stacks block and a hash that points to the previous Bitcoin block. This hash is generated by combining the hash of the previous Bitcoin block with the hash of the previous Stacks block. As a result, each new Stacks block includes a hash pointing to the previous Bitcoin block at its header, thereby binding the two networks together.
Here’s an example:
Let’s say Alice is a Stacks PoX (Proof of Transfer) miner who wants to become the leader of the next block. She can participate in a bidding process on the Stacks network by spending Bitcoin (BTC). The higher her bid, the greater her chances of becoming the leader. This bidding process takes place on the Stacks chain, while the new block is written to the Bitcoin layer.
Once Alice wins the leader bidding, she starts creating a new block and adds it to the Stacks layer. As a reward, Alice receives a certain amount of STX tokens. These STX tokens are composed of transaction fees paid by other Stacks users and, due to the PoX mechanism, obtained by Alice spending BTC.
In summary, PoX differs from Bitcoin’s PoW (Proof of Work) consensus mechanism, but it utilizes already mined BTC as security instead of mining power and uses STX tokens instead of BTC as miner rewards.
Nakamoto Upgrade
The Nakamoto Upgrade is the next major upgrade for Stacks, scheduled for release in Q4 of 2023. This upgrade is significant as it introduces five important features, with the most notable being the security protection of Stacks transactions by the Bitcoin network. This feature enhances the security and reliability of Stacks transactions and transforms it into a true Layer 2 solution rather than an independent sidechain with its own state. Additionally, it introduces decentralized, bi-directional Bitcoin anchoring (sBTC), which has the potential to unlock a “Bitcoin DeFi market” worth hundreds of billions of dollars. Furthermore, the upgrade brings faster block times of 4–5 seconds and support for programming languages like Solidity, greatly improving network performance and reducing barriers for developers to enter, thus providing the conditions for ecosystem projects to flourish.
According to the information provided in Stacks’ December whitepaper regarding the Nakamoto Upgrade, the more detailed contents are as follows:
1. Shared Network Security with BTC: Enables Stacks transactions to benefit from Bitcoin’s finality of confirmation. After approximately 100 Bitcoin blocks or approximately one day, transactions on the Stacks layer will be protected by the hash power of the entire Bitcoin network. This means that to reverse these transactions, an attacker would need to attack the entire Bitcoin network. These transactions settle on the Bitcoin network and possess Bitcoin’s finality. Additionally, the Stacks layer forks simultaneously with the Bitcoin network, so any state on the Stacks layer automatically follows Bitcoin’s forks.
2.sBTC: Introduces a new decentralized, non-custodial Bitcoin-pegged asset called sBTC, allowing smart contracts to run faster and cheaper without compromising security. This enables Stacks layer contracts to write to the Bitcoin network with trust in anchored transaction. Stacks already supports BTC atomic swaps, enabling Bitcoin addresses to own and move assets defined on the Stacks layer. Implemented examples of trustless atomic swaps between Bitcoin L1 and the Stacks layer are Magic swaps and Catamaran swaps. Furthermore, users can own Stacks layer assets, such as STX, stablecoins, and NFTs, on Bitcoin addresses and transfer them via Bitcoin L1 transactions.
3.Clarity Language: Clarity is a secure and decidable language for provable smart contracts. With Clarity, developers can output execution results before executing, determining what a contract can and cannot do. Clarity greatly enhances the security of on-chain smart contracts. For example, with Clarity, it is possible to determine the balance of your account after a signature operation or a transfer before confirmation. As of December 2022, over 5,000 Clarity contracts have been deployed on the Stacks layer.
4.Bitcoin State Reading: Enables full reading of Bitcoin chain data, supports reading Bitcoin transactions and state changes, and executes smart contracts triggered by Bitcoin transactions. Bitcoin reading capabilities allow for synchronization of Bitcoin L1 and L2 network data.
5.Fast Block Times and Custom Subnets with Multi-Language Support: The current block time is 10 minutes, but with the upgrade and Byzantine consensus, block times can reach 4–5 seconds, breaking the 10-minute block time limitation of Bitcoin. Transaction hashes will be written to Bitcoin for network security with each Bitcoin block. Additionally, scalability layers such as subnets can make different trade-offs between performance and decentralization compared to the Stacks mainnet. Subnets can support other programming languages and execution environments, such as Ethereum’s Solidity and EVM, enabling all Ethereum smart contracts to utilize Bitcoin-anchored assets and settle on the Bitcoin chain.
SBTC
SBTC is a core product of the Nakamoto network upgrade. In the absence of native assets on the Layer 2 (L2) network, the financial ecosystem of the L2 network cannot operate. SBTC addresses this issue by enabling decentralized Bitcoin lending, Bitcoin-backed stablecoins, and more. Compared to current BTC-pegged token solutions, SBTC offers a more decentralized and native anchoring approach, which can gain a significant share in the BTC-pegged token market and greatly increase the Total Value Locked (TVL) and user base of the Stacks network.
Key features of SBTC include a decentralized set of signers as validators, which dynamically change and overcome the centralization challenge of limited maximum signers (15) and the inability to change signers in BTC multi-signature addresses. On the other hand, as the core asset of the Stacks L2 network, the disadvantage is the lack of incentives in the mainstream applications of the ETH ecosystem, while the advantage is gaining incentives from all DeFi applications on the Stacks network. Finally, the market value of SBTC has imaginative potential through the issuance of stablecoins based on SBTC.
Figure: SBTC determination/unlocking process
The basic principles of BTC-pegged assets are as follows:
1. Lock-Mint: Lock BTC on the BTC chain and mint anchored assets on the target chain.
2.Burn-Unlock: Burn anchored assets on the target chain and release BTC on the BTC chain.
Due to the lack of Turing completeness on the BTC chain, the locking of BTC on the BTC chain requires the involvement of a custodial account managed by a custodian. When a Burn transaction occurs, the Unlock process must be manually completed by the custodian.
BTC-pegged token application chains with Turing completeness (e.g., WBTC on the ETH chain) can choose to deploy BTC light node contracts on the target chain. When users submit Lock transactions to the light node contract, it can verify the contract and execute the Mint action. Alternatively, relying on custodians to verify Lock transactions and execute Mint is also an option.
The key point in the design of BTC-pegged assets is the custodian mechanism, which determines whether the anchoring solution is centralized or decentralized and affects the security of the assets.
The specific process of Minting and Burning SBTC is as follows:
When a user wants to convert BTC to SBTC, they need to send BTC to a multi-signature address and initiate a transaction on the Stacks network. This transaction triggers a smart contract that sends BTC to the multi-signature address and creates a corresponding amount of SBTC assets on the Stacks network. When a user wants to convert SBTC back to BTC, they need to send a message to the smart contract and initiate another transaction on the Stacks network. This transaction triggers another smart contract that burns the corresponding amount of SBTC assets and sends the user the corresponding amount of BTC.
Analysis of BTC-pegged Tokens on the Ethereum Chain
Figure: BTC-pegged Tokens on the Ethereum Chain
2020–04–01: 2,500 BTC
2022–05–01: 334,541 BTC (+133.8X)
The DeFi Summer and the chase for Total Value Locked (TVL) led to rapid growth in BTC-pegged tokens on the Ethereum chain. The peak circulating market value of BTC-pegged tokens accounted for approximately 1.57% of the total BTC market value. WBTC had the largest market share at 83%, followed by HBTC at 11.5%. Centralized BTC-pegged tokens accounted for over 95% of the market share, while in decentralized solutions, REN BTC had the largest scale with a share of around 2%. In November 2020, REN BTC briefly reached a market share of over 15%.
Comparison between Stacks and RSK
Stacks and RSK are both Bitcoin-based smart contract platforms aimed at expanding the functionality and use cases of Bitcoin. Here are some advantages of Stacks compared to RSK:
- Deeper connection to Bitcoin: The connection between the Stacks layer and the Bitcoin mainchain is more profound and tight. Specifically, the Stacks layer utilizes a technology that enables smart contract functionality, allowing Stacks to directly use Bitcoin as its asset or currency and settle transactions on the Bitcoin mainchain. This design creates a closer integration with the Bitcoin mainchain and better utilizes the security and stability of Bitcoin.
- More efficient smart contract execution: The Stacks layer adopts a new smart contract programming language called Clarity, which aims to improve the reliability, security, and auditability of smart contracts. Clarity language offers advantages such as conciseness, clarity, predictability, and ease of auditing, making smart contract execution more efficient and reliable.
- Better decentralized governance: The Stacks layer employs a decentralized governance model, allowing community members to participate in platform decisions. Going forward, the Stacks layer will continue to advance decentralized governance and provide more opportunities for community engagement. On the other hand, RSK governance is conducted through a governance council composed of five seats representing community participation.
- Wider ecosystem support: The Stacks ecosystem is actively growing and has attracted many notable projects and companies to join. For example, Blockstack PBC (now renamed Hiro Systems) is one of the most significant projects within the Stacks ecosystem, and it has developed many applications based on the Stacks platform. The Stacks ecosystem aims to provide developers with a range of tools and resources to build decentralized applications.
Token Economic Model
The total supply cap for the STX token is 1.818 billion, with a current circulating supply of approximately 1.36 billion.
The genesis block of the Stacks cryptocurrency contained 1.32 billion STX tokens. These STX tokens were distributed through several issuances in 2017 and 2019. The 2017 issuance had a price of $0.12 per STX, the 2019 issuance had a price of $0.25 per STX, and the SEC-compliant issuance in 2019 had a price of $0.30 per STX.
The distribution of mining rewards is as follows: 1,000 STX per block for the first 4 years, 500 STX per block for the next 4 years, 250 STX per block for the subsequent 4 years, and then a permanent distribution of 125 STX per block. The STX allocated to founders and employees follow a 3-year unlocking schedule.
https://gaia.blockstack.org/hub/1Eo6q4qLMcSSpkhoUADxRAGZhgUyjVEVcK/stacks-zh.pdf
Figure: STX Token Allocation
Stacking Rewards: Stacking is a staking mechanism where users can secure the network and earn STX rewards by staking their STX tokens. Stacking rewards vary based on the amount of staked STX and the overall network participation rate. Holders can choose different stacking periods to earn different rewards. Generally, longer stacking periods offer higher rewards. The reward size depends on the amount of tokens locked and the length of the stacking period. Participants receive their rewards at the end of the stacking period in the form of STX, which is stored in their wallets. The length of a stacking period is approximately 1,800 blocks, equivalent to around 2 weeks. At the end of each stacking period, participants can choose to continue stacking or exit.
Liquidity Mining: In addition to stacking rewards, users can earn STX by providing liquidity to the Stacks DEX (decentralized exchange) on the Stacks blockchain.
Governance: STX token holders have governance rights over the Stacks blockchain and can vote on proposals and changes to the network.
Burn Mechanism: A portion of transaction fees on the Stacks blockchain is burned over time, reducing the overall supply of STX tokens.
4.Network and User Status
Figure: Stacks TVL Changes
Figure: Stacks Wallet Count
Figure: Stacks Contract Deployments
Compared to Layer 2 solutions on Ethereum, Stacks is still relatively small in terms of its volume, whether it’s Total Value Locked (TVL) or the number of active addresses.
In Q4 2022 and 2023, the number of Stacks network addresses experienced significant growth, mainly driven by BNS domain registrations and the vibrant BTC ecosystem.
The number of contract deployments has surged in the first half of 2023, indicating optimistic prospects for ecosystem development.
5.Huge Development Potential for BTC Layer 2 Projects
Currently, the amount of BTC bridged to the Ethereum network through various solutions is approximately 165,000 BTC, and the total BTC holdings in the top 100 marked addresses by Binance exchange is 375,000 BTC. BTC holders who are willing to take on the centralized custody risk show relatively high acceptance of BTC Layer 2 solutions. Based on this, it can be speculated that the Total Value Locked (TVL) of BTC Layer 2 solutions could reach the level of 500,000 BTC in an optimistic scenario.
On the other hand, the current total amount of BTC on Stacks is only around 2,700 BTC, which has not fully unlocked the potential value of BTC. This indicates that BTC Layer 2 solutions still have significant room for development. If the TVL of BTC Layer 2 can reach 500,000 BTC, it would unlock a value of $13.5 billion at the current BTC price, which is 3.7 times the TVL of Layer 2 solutions on Ethereum. Stacks, as the most thriving Layer 2 project in the Bitcoin ecosystem, could potentially be the biggest beneficiary.
The ratio of ETH TVL to ETH Layer 2 TVL (mainly Arbitrum and Optimism) is approximately 11.38.
The ratio of BTC TVL (BTC FDV) to BTC Layer 2 TVL (including Stacks and Rootstock) is approximately 17,074.
The ratio of ETH FDV to ETH Layer 2 FDV (mainly Arbitrum and Optimism) is approximately 11.72.
The ratio of BTC FDV to BTC Layer 2 FDV (including Stacks and Rootstock) is approximately 441.32.
Based on a simple comparison of TVL and FDV, BTC Layer 2 projects are relatively overvalued compared to Ethereum Layer 2 projects. This is mainly due to higher market expectations for BTC Layer 2 solutions.
Using the TVL/FDV values of the current Ethereum Layer 2 projects, Arbitrum and Optimism, as reference values, an estimation can be made for Stacks.
TVL predictions are divided into optimistic, neutral, and pessimistic scenarios. In the optimistic scenario, the TVL is projected to reach 500,000 BTC, which is the sum of Ethereum-crossed BTC and the BTC held in Binance-marked addresses. In the neutral scenario, it reaches the amount of BTC anchored on Ethereum. In the pessimistic scenario, it reaches 20,000 BTC.
6.Team Members and Recent Updates
In the early stages, the main company behind Stacks was Blockstack PBC, which has since been renamed Hiro Systems PBC (referred to as Hiro). Muneeb Ali is the founder of Hiro and a key member of the Stacks project. The core team members have extensive experience in the field of distributed systems, including six Ph.D. holders in distributed systems and two scientists who have received the U.S. “Presidential Career Award.”
Core Members of the Stacks Ecosystem
Muneeb Ali, Co-founder of Stacks and CEO of Hiro, holds a Ph.D. in computer science from Princeton University and specializes in building full-stack solutions for decentralized applications. He has given talks at forums like TEDx, spreading knowledge about cryptocurrency, blockchain, and has authored numerous academic publications and whitepapers on related topics. He is currently active on Twitter, and much of the information regarding product updates and development plans can be sourced from Muneeb.
Jude Nelson, Chief Technology Officer (CTO) of Stacks, was previously an engineering partner at Hiro and obtained a Ph.D. in computer science from Princeton University. He was a core member of PlanetLab, a laboratory that received the ACM Test of Time Award for implementing and deploying planetary-scale experiments. His research has covered topics such as optical and storage systems, and Content Delivery Networks (CDNs). He has been using Vim for over ten years. In the past year, he has been one of the major contributors on the Stacks GitHub repository, with 1,273 contributions.
Aaron Blankstein, Chief Security Officer (CSO) of Stacks, joined the Blockstack engineering team after receiving his Ph.D. in 2017. He studied computer science at Princeton University and MIT. His research covers multiple topics, primarily focused on web application performance, caching algorithms, compilers, and applied cryptography. His research on CONIKS received the Caspar Bowden Privacy Enhancing Technologies Award in 2017. He has been using Emacs for over ten years. In the past year, Aaron has made 581 contributions.
7.Development and Ecosystem Project Status
Stacks was initially launched as an open-source project by Bitcoin builders, and the developers behind it have rich experience in building applications and protocols on top of the Bitcoin network. Currently, there are over 30 independent entities and developers contributing to the Stacks ecosystem, making it one of the most thriving ecosystems among BTC Layer 2 projects. As of March 2023, the official website lists a total of 88 projects, with a focus on 8 key projects.
Key Projects listed on the Stacks official website
For specific project information, please refer to the official website: https://www.stacks.co/explore/discover-apps
According to the latest updates shared by Stacks founder Muneeb on Twitter in February 2023, the following tracks and projects were highlighted:
NFTs on Stacks L2: Projects such as Gamma.io and Satoshibles
Stacks Wallet Applications: Xverse and Hiro Wallet
DeFi on Stacks L2: ALEX and Arkadiko Protocol
As wallets and NFT marketplaces do not issue their own tokens, the focus here is on two DeFi protocols: ALEX and Arkadiko Protocol.
Alex Lab
Alex Lab is the leading DeFi application in the Stacks ecosystem, offering a wide range of product features, including a LaunchPad for token launches, lending and borrowing services, a decentralized exchange (DEX), an order book, and perpetual contracts. Additionally, Alex Lab maintains active interactions with other ecosystem participants, including wallet developers, and enjoys high recognition within the community. Considering that the development language in the Stacks ecosystem is Clarity, which presents a higher entry barrier for Ethereum or other ecosystem developers, Alex Lab has established a moat in the Stacks ecosystem in the short term. This leading position is expected to expand with the growth of other projects within the Stacks ecosystem.
Data Update Date: 2023–05–10
Recent significant updates:
- Product Launch: Order Book testnet has been launched.
- Product Launch: Cross-chain perpetual contracts are set to be launched soon.
- Product Plan: Alex Lab plans to support the Ordinals protocol and enable NFT trading on the Bitcoin network (specific plans to be announced on Medium in the coming weeks).
- Token Release: The release of ALEX tokens is expected to halve after block height 103,825.
- Funding: Completed a $2.5 million strategic round with participation from Trust Machines and Gossamer Capital.
Team:
Chiente Hsu, CEO — holds a Ph.D. degree and has been involved in quantitative investment. He previously served as Global Head of Credit Suisse Alpha Strategies and Global Head of Quantitative Investment Strategy Research at Morgan Stanley.
Rachel Yu, Co-founder — holds a Master’s degree in Science and is an alumna of Goldman Sachs and J.P. Morgan Asia. She led the institutional sales team in China. After successfully establishing a high-frequency data and machine learning trading company, she co-founded ALEX.
Chiente and Rachel have extensive experience in various domains of the financial industry. Alex Lab’s development team consists of experts with backgrounds in financial engineering, smart contract development, and cryptocurrency.
Product:
LaunchPad: Currently, two projects have conducted IDOs (Initial DEX Offerings) on the LaunchPad: ALEX on January 19, 2022, and BANANA (Bitcoin Monkey, similar to BAYC). As the Stacks ecosystem lacks projects with token launches, the LaunchPad feature has not demonstrated significant contributions to the ecosystem.
Figure: Alex Labs Trading Volume
Swap: Currently supports the exchange of 12 different tokens. The latest daily trading volume is $0.8 million. In February, with the increasing popularity of BTC L2, the daily trading volume significantly increased compared to January, reaching a peak of $3.5 million on February 19. The majority of the trading volume is concentrated in STX and ALX trading pairs. Subsequently, with the listing of the ALEX token on centralized exchanges, on-chain trading volume decreased. The lack of high market cap trading assets is not only a challenge for ALEX but also for the entire BTC L2 ecosystem. Due to the popularity of BRC20, Alex Labs will launch a BRC20 exchange.
Liquidity Pools: Supports 13 liquidity pools, with the largest pool being STX — ALEX.
Figure: Alex staking page
Staking: Staking annualized rewards and the staking period are related to whether one chooses to compound the rewards automatically. From the chart, it can be seen that the total staked amount is 123 million tokens. The minimum staking period is approximately 4 days, and to achieve the maximum annualized rewards, staking for 100 periods (around 100 days) is required. Staking rewards can also be compounded automatically.
Farm: By staking LP Tokens from liquidity pools, users can earn ALEX rewards and APower, which is a metric for obtaining LaunchPad allocations. Currently, 5 LP Tokens are supported, with annualized rewards ranging from 34% to 57%.
Order Book Functionality: Currently in the Beta testing phase, the product’s UI design and user experience are smooth and well-designed.
Economic Model:
Total token supply of 1,000,000,000 tokens.
20% allocated to the foundation, distributed to the community reserve pool to support the ALEX ecosystem, early adopters, and future development.
50% reserved for community staking or providing liquidity tokens to earn $ALEX.
30% allocated to employees, advisors, early investors, and the founding team.
Alex Labs has set a cap on the annual circulation increase of ALEX for the community portion:
Figure: Annual circulation limit for the community portion
Arkadiko Protocol
Arkadiko is a stablecoin protocol similar to MakerDAO. Its primary goal is to enhance asset liquidity on the Stacks network by enabling users to collateralize assets on Stacks and mint the stablecoin USDa, thereby promoting the development of USDa on the Bitcoin Layer 2 network.
Project Overview
Data Update Date: 2023–05–13
Recent Major Updates:
- Stacks 2.1 was released, and after integration with Arkadiko, users will be able to earn Stacking rewards while minting USDa using STX.
- The stablecoin liquidity pool has been relaunched to increase the liquidity and stability of USDa.
- In late February 2023, a new roadmap was released, indicating plans for a token economics upgrade to reduce Diko selling pressure.
Product:
Compared to Alex Lab, Arkadiko Protocol focuses primarily on stablecoins, with other functional modules serving as auxiliary features. In comparison to stablecoin projects on Ethereum, Arkadiko’s product performance is currently relatively modest. However, with the launch of SBTC on Stacks in the fourth quarter of 2023, it is expected to provide sufficient collateral for Arkadiko’s stablecoin minting and potentially enter a period of rapid growth.
SWAP: Currently supports trading for 7 pairs of tokens, with USDa, STX, and XBTC being the primary tokens. The total value locked (TVL) in the liquidity pool is $2.39 million USD, indicating a relatively small scale.
Borrow: Supports borrowing of USDa using STX, XBTC, and ALEX.
Stake: Supports staking of stDiko, USDa, and LP tokens from the liquidity pool. The annualized yield ranges from 50% to 76.03% for most tokens, with stDiko offering a 7.4% annualized yield, maintaining relatively high levels of yield.
Governance: 22 proposals have been completed thus far, with the latest ongoing proposal being the integration of Stacks 2.1.
Token Distribution:
Figure: Token Allocation
The total token supply is 100,000,000 tokens.
21% Team — Vested over 4 years with monthly unlocking after a 6-month lockup period.
12% Strategic Funding — Vested over 4 years with monthly unlocking after a 6-month lockup period.
17% Arkadiko Foundation Treasury — Tokens held by the foundation with release specifics based on purpose.
50% Ecosystem Incentive Pool — Incentives for users providing liquidity to the protocol.
Figure: Token Release
The initial weekly release is approximately 1.3 million DIKO, followed by a 2% reduction every two weeks. Currently, the circulating supply is 35,902,590 tokens, accounting for 35.9% of the total token supply.
Conclusion
Stacks Labs is currently the most prosperous Bitcoin Layer 2 project in terms of ecosystem development, despite having lower TVL and active address data compared to Ethereum Layer 2 projects. The Bitcoin Layer 2 space has significant potential for growth. The upcoming Nakamoto upgrade in Q4 2023 will introduce five important features. Of particular interest is the enhancement of security for Stacks transactions through the protection of the Bitcoin network. This feature will make Stacks transactions more secure and reliable, establishing it as a true Layer 2 solution rather than an independent sidechain. Additionally, the introduction of decentralized and two-way Bitcoin anchoring (sBTC) has the potential to unlock a “Bitcoin DeFi market” worth hundreds of billions of dollars. The faster block times of 4–5 seconds and support for programming languages used in other networks, such as Solidity, greatly improve network performance and lower the entry barrier for developers, providing conditions for the ecosystem projects to thrive.
As the leading DEX product in the Stacks ecosystem, Alex Lab offers a rich product suite and provides a good user experience. The team demonstrates strong engineering capabilities and shows proficiency in capturing trends, as seen in their support for Ordinals NFT trading. The team has clear development directions.
However, Alex Lab currently faces two important challenges. Firstly, there is a lack of tradable assets compared to Ethereum and other ecosystems, resulting in lower TVL and active user numbers. Secondly, transaction confirmations are extremely slow, with a SWAP interaction requiring a wait of 4 BTC blocks, averaging 40 minutes. This issue is expected to be resolved with the Stacks Q4 upgrade, which aims to reduce block time to 4–5 seconds.
Overall, despite these challenges, Alex Lab remains an excellent product, and it is poised to benefit from the initial issuance and trading activities of various project tokens in the event of a Bitcoin Layer 2 breakout.
Arkadiko Protocol, as an early and continuously developed stablecoin project on Stacks, has a team with good technical capabilities and closely collaborates with Stacks official and existing ecosystem projects. However, the project currently relies mainly on STX as collateral, which has a relatively low market value. Additionally, the stablecoin USDA also faces challenges of an underdeveloped ecosystem and limited use cases. It is anticipated that with the release of Stacks SBTC, which will provide sufficient collateral for USDA, and the gradual enrichment of Stacks Layer 2 applications, USDA can gain a market share in the stablecoin market, particularly in the Bitcoin Layer 2 network.
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